Claim 6 Simple Tax Exemptions to Save You Big
I wouldn’t trade self-employment for anything, but there is one major drawback—writing a check to the IRS each year.
Unlike an employee, I’m responsible for paying my own federal and state taxes, plus I have to plan ahead for the dreaded self-employment tax. I have to say, you don’t realize just how much of your income goes to taxes until you’re setting the money aside yourself. Fortunately, I'm able to write off several expenses and reduce how much I owe.
The good news is that you don't have to be self-employed to take advantage of tax deductions that can lower your tax bill or result in a bigger return. You may already benefit from write-offs such as home mortgage interest and the cost of child care. But you might also be leaving money on the table.
Here are six tax deductions you might overlook.
1. Get exemptions on mileage for charity work or volunteering
If you clean out your closets at least once a year and donate items to a charity, then you probably know that you can write off these donations. You can deduct up to $250 without documentation, but anything over this amount requires a receipt or bank records. If total yearly deductions for non-cash contributions is more than $500, you have to complete IRS Form 8283 and attach it to your return.
What you may not realize, however, is that charitable donations don’t stop with actual items or cash. You can also write off transportation costs associated with volunteering or attending a charity event. Keep track of your mileage while doing any type of charity work and you can deduct $.14 per mile for the 2015 tax year, plus the cost of tolls and parking fees.
2. Write off mortgage refinancing points
The home mortgage interest deduction has saved me tens of thousands over the past nine years. But it’s not just mortgage interest you can deduct. If you refinance your mortgage to get a better interest rate and possibly a lower monthly payment, you can also deduct discount points paid while refinancing the mortgage.
A discount point is a type of prepaid interest that lowers you mortgage rate and helps you save money over the life of the loan. Each discount point costs about 1 percent of the mortgage balance and typically reduces your mortgage rate by .25%.
With a first mortgage, you can deduct all points in the year you paid them. But when refinancing a mortgage, the deduction is spread out over the life of the loan. So if you have a 30-year mortgage and you paid $2,000 in discount points, you can deduct roughly $66 each year. If you pay off the mortgage by selling the property or refinancing again, you can deduct any remaining points in that year.
3. Get tax exemptions health insurance premiums
There is nothing cheap about healthcare. I pay 100% of my own healthcare out-of-pocket, but thankfully I’m able to write off premiums and reduce my taxable income. You can also take this deduction if you are self-employed, but only if you're not eligible to participate in an employee subsidized health plan, such as a plan offered through your spouse’s employer.
But you don't necessarily have to be self-employed to deduct expenses paid for medical and dental care for yourself, spouse, and dependents. You can write-off copays for doctor and hospital visits and other qualifying medical expenses, such as health insurance premiums.
You can't deduct the cost of health insurance if your employer covers the entire cost. If you pay a percentage of your own health insurance, writing off this expense depends on whether premiums are paid with your pre-tax or after-tax dollars.
If your premiums are paid with pre-tax dollars and deducted from your wages before taxes, you’re already receiving a tax benefit. And unfortunately, the IRS doesn’t allow double-dipping. You can, however, write off your portion of health insurance premiums paid with after-tax dollars. If premiums are paid with after-tax dollars, your employer will include the amount of your premiums in Box 1 on your W-2.
If you're not self-employed, you can only deduct medical expenses that exceed 10 percent of your adjusted gross income, or 7.5 percent if you or your spouse is 65 or older.
4. Deduct expenses paid for financial advice
If you’re getting your financial house in order with the help of an advisor, don't forget to write off any fees paid for services. These can include management fees paid to your advisor, phone calls, and even monthly or yearly subscription fees for financial publications you subscribe to. To benefit from this deduction, you have to itemize your tax return, and the cost of financial planning services must exceed 2 percent of your adjusted gross income.
5. Get a tax break for driving from one job to your next job
The cost-of-living isn’t getting any cheaper, and for some, making ends meet requires holding down two jobs. In 2014, about 4.9 percent of working U.S. adults had more than one job, “with about half holding a full-time and a part-time position,” reports Bloomberg.
Self-employed people can write off their work-related mileage as a business expense. Employees, on the other hand, can't write off the cost of driving to and from work, unless they’re getting off one job and immediately driving to another job. If you work two jobs and this applies to you, you can deduct a portion of the cost from going from one job to another. You can also write off mileage when you travel from your employer’s location to a client, and when you travel between clients.
The mileage write-off only works if it’s a straight trip, so you can’t stop and take care of personal matters while traveling from one job to another. Keep a driving log in your car and track your mileage. For the 2015 tax year, you can write off 57.5 cents per mile.
6. Claim an aging parent as a dependent on your return
Your child isn’t the only dependent you can claim on your tax return. If you’re also caring for an aging parent, this individual may qualify as one of your dependents. And interestingly, your parent doesn’t have to live under your roof to qualify. If he lives in his own house, a nursing home, or another facility, you can claim the deduction as long as you’re paying the costs.
There are specific requirements. For example, your parent’s income cannot exceed the limit determined by the IRS, which can change from year-to-year.
“Social Security normally is excludable, but if they have other income, which in many cases means interest and dividends, some is taxable," says John W. Roth, a senior federal tax analyst with CCH Inc.
To claim a parent as a dependent, you also cannot provide more than half of their financial support during the tax year in question, so you need to have a pretty good idea of how much of a parent’s costs you cover, including food, medical bills, and everyday living expenses. "When the parent lives in your home, to reach the 50 percent-plus threshold, you should take into account the fair-market room rental, food, medicine and other little support items," explains Roth.